Stablecoins: risks, potential and regulation

Summary

Focus

Both the emergence of distributed ledger technology (DLT) and rapid advances in traditional centralised systems are moving the technological horizon of money and payments. These trends are embodied in private "stablecoins": cryptocurrencies with values tied to fiat currencies or other assets. This paper looks at market developments, how they might be monitored, the potential role of stablecoins and what this implies for their regulation.

Contribution

We sketch market developments for existing stablecoins and describe their potential for embedding a robust monetary instrument into digital environments. We then assess "global stablecoin" proposals, including Facebook's revised Libra 2.0 project. We discuss potential regulatory responses, including focusing on the necessity of a balanced proportional approach. Stablecoins raise the option to embed supervisory requirements into stablecoin systems themselves, allowing for "embedded supervision". We conclude with a discussion of whether central bank digital currencies (CBDCs) or other initiatives could provide more effective solutions to fulfil the functions that stablecoins are seeking to address.

Findings

We show a dichotomy between existing stablecoins and planned global stablecoins. Existing stablecoins aim to serve as a means of settlement for automated financial products, offering the possibility of so-called "smart" contracts, ie self-executing code. Global stablecoin proposals like Libra claim that they will make possible new forms of online exchange through their 24/7 availability, borderless nature, fractionalisation and integration with non-financial services. In this light, they aim to challenge existing digital means of payment for e-commerce like traditional bank payments, credit cards and electronic wallets.

We argue that the regulatory responses to global stablecoins should take into account this difference. The response to global stablecoins should address the potential for other stablecoin uses, such as embedding a robust monetary instrument into digital environments, especially in the context of decentralised systems. Looking forward, in such cases, stablecoins may allow for embedded supervision. At the same time, we suggest that many of these benefits may be achieved - and arguably more effectively in many cases - with CBDCs and other initiatives such as fast payment systems.

Abstract

The technologies underlying money and payment systems are evolving rapidly. Both the emergence of distributed ledger technology (DLT) and rapid advances in traditional centralised systems are moving the technological horizon of money and payments. These trends are embodied in private "stablecoins": cryptocurrencies with values tied to fiat currencies or other assets. Stablecoins - in particular potential "global stablecoins" such as Facebook's Libra proposal - pose a range of challenges from the standpoint of financial authorities around the world. At the same time, regulatory responses to global stablecoins should take into account the potential of other stablecoin uses, such as embedding a robust monetary instrument into digital environments, especially in the context of decentralised systems. Looking forward, in such cases, one possible option from a regulatory standpoint is to embed supervisory requirements into stablecoin systems themselves, allowing for "embedded supervision". Yet it is an open question whether central bank digital currencies (CBDCs) and other initiatives could in fact provide more effective solutions to fulfil the functions that stablecoins are meant to address.

JEL Codes: E42, E51, E58, F31, G28, L50, O32.

Keywords: stablecoins, cryptocurrencies, crypto-assets, blockchain, distributed ledger technology, central bank digital currencies, fintech, central banks, regulation, supervision, money.